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Unformatted text preview: ECO 304L Norman: Final F05A
Name: Group Leader:
(10 pts)
1. What is Ideal Keynesian policy over the business cycle. Draw a graph. What are the difﬁculties in
implementing such a policy? 2. Create and label two 2X2 tables that clearly indicate you know the difference between absolute and
comparative advantage. 11. Math and Policy Section: SHOW ALL WORK” Page 2
Name: Group Leader:
Exam 1 Question A. Dynamic Macro Model 1:
Given the following simple dynamic Keynesian model: YtICtl—It
CtICllbYt—i Where a : 500,1) : 5/6, [0 : 600, (1) Suppose the model is initially in equilibrium. What is the equilibrium Y0? ANSWER a. 5500 b 6000 c. 6600 d 7200 Suppose in period 1 I increases from 600 to 660 and remains at 660. (2) What is Y2 ANSWER a. 6660 b 6710 c 6776 d 6878? (3) What value does Yt gradually approach as 15 goes to inﬁnity? ANSWER a. 6960 b 6990 c. 7060
d 7166 (4) Suppose in stead of (2) and (3) above that It is 600, 590, 620, 610, 400 fort : 0,1,2,3,4 and remains
at 400 for t > 4. What is Y00 ANSWER a. 5000 b 5200 c. 5300 d. 5400 Now consider a slightly more general model YtICtl—Itl—Gt
Ct=a+b(Yt—1—Tt—1) Where a : 300,1) : 5/6, [0 : 400, G0 : 300, To : 300
Suppose in period 0 the economy is in equilibrium. If in period 1 G increases from 300 to 360 and remains
at 360, While T increases from 300 to 330 in period 2 and stays there, What is
(5) Y0 ANSWER a. 4500 b. 4550 c 4560 d. 4600
(6) Y1 ANSWER a. 4550 b. 4560 c. 4660 d. 4700
(7) Y2 ANSWER a. 4600 b. 4606 c. 4610 c. 4616
(8) Y00 ANSWER a. 4700 b 4710 c 4760 d 4210
WORK SPACE 2. Exam 2 Questions
A. Banking
9 To expand the money supply the FED should: a. Raise the discount rate b. Raise the required reserve ratio C. Buy government securities from banks d. Sell government securities to banks
10 The interest rates will: a. Go down b. Go up c. Remain unchanged d. Can not tell Assume the FED’s transaction to contract the money supply is $20M and to maximize proﬁts the banks keep
reserves down to the legal minimum. Given a very large number of standard banks whose initial position is shown
below and where R is reserves7 GS is government securities7 L are loans7 DD is demand deposits and the required
reserve ratio is 10% Questions are in the boxes and the answers are below: BANK 1
Assets Liabilities Assets Liabilities Assets Liabilities
R $30M DD $300M R $ ______ M DD $ ______ M R $Q11 belowM DD $Q12 below M
GS 140M GS ______ M GS Q13 belowM
L 130M L ______ M L Q14 below M
BANK 2
Assets Liabilities Assets Liabilities Assets Liabilities
R $30Vl DD $300Vl R $___ M DD $___ M R Q15 below M DD Q16 below M
GS 140Vl GS ___ M GS Q17 below M
L 130Vl L ___ M L 20 Q18 below M 11. a. 20 b 30 c 40 12. a 280 b 300 c 320 M 13 a 120 140 160 14 a 110 b 130 c 140
15. a. 28 b 30 c 32 16. a 280 b 300 c 320 M 17 a 120 140 160 18 a 112 b 130 c 148 19. (1 pts) If you buy a $2000 consul with the interest rate at 7.5% and the interest rate rises to 15%7 the value of
your consul is now a. 1000 b. 2000 c. 3000 d. 4000 20. (1 pts) The FED can always eﬂect an contraction because:
a. The FED can sell government securities at a loss
b. The FED can verbally convince bank presidents to call in loans
c. Banks may decide not to make new loans. (2 plus 2 bonus) Assume the FED’s transaction to expand the money supply is $10M and this initial transaction
takes place with a rich individual who deposits the money in his bank and to maximize proﬁts the banks keep
reserves down to the legal minimum and the required reserve ratio is 10%. Given his bank whose initial position is shown below. questions are in the boxes and answers are below. THINK, DO NOT DO A KNEE
JERK!!!: BANK 1
Assets Liabilities Assets Liabilities Assets Liabilities
R $20M DD $200M R $ ______ M DD $ ______ M R Q21 below M DD Q22 belowM
GS 90M GS ______ M GS Q23 belowM
L 90M L ______ M L Q24 below M 21 a19b20c21 22 a190b.200c210 23a. 80b90c. 100 24a81b90c99 SHOW WORK IN MARGINS Name: Group Leader: B. lS—LM Problem (30 pts ) Answers may or may not be integer
Variables: Y real GNP C consumption I investment MG government expenditures T taxes 1 interest rate M3 supply of money7 p price level— sreal supply of money7 a I) I0 c7 6, and f are known constants IS: 1. YzC—l—I—l—G C:a+b(Y—T) I:I0—ci IS Solved: Y— — MA — Ci) where k = (1:19) and A = a I I0 I G — bT
LM Solved M—s _ —eY— fz Equations to spolve the IS— LM model
Y —— 1501— — kA
eY — fz— — Ms/p IS LM Solved for Y Y— K[A + EM—S] where K— — [TQM]
f
[few — K)AG. A eqns: 1. AY = KAG 2. AI = —%AY 3. A? = 4. AY = mm + A10 + AG — bAT)
Given:G=900T=890M32500a=5005=3/4I0:800p:1. 6:0.25f2857c
: 2000 :> k = 4 and K = 1.2 Math a) to e) Must show work choose closest answer below. 25 What is the equilibrium Y7 Answer a. 3096 b. 3128 c. 3239 d. 3456 26 Suppose that to reduce unemployment the government desires to raise Y by 72. What is the required AG? Answer a. 44 b 60 c. 80 d. 120 27 If G is increased by the amount in 26 above, how much I is crowded out? Answer a. 42 b 50 c.
55 d. 60 28 Now suppose the real money supply Ms/p is increased to compensate the crowding out. What is
AMS/p? Answer a. 60 b 70 c. 100 d. 120 29 Suppose the government in 26 used AT instead of AG and at the same time a decreased by 10 and I0
increased by 20, what is the required AT Answer a. 133.33 b 66.67 c. 44.44 (1. 33.33 30 Repeat your answer to 29 On exam: (3 pts) Draw and label IS/LM curves for above questions More advanced
On exam: (4 pts)Use the IS/LM curves to explain demand pull inﬂation.
31 What is the resulting deﬁcit from 26)Answer a. 70 b 75 c. 80 d. 85
32. Repeat your answer to 31
33 What would be the AG and AT to achieve a balanced budget and raise Y by 72 Answer for AG 3.
260 b 270 c. 280 d. 290
34 Answer for AT 3. 260 b 270 c. 280 d. 290
35. Repeat your answer to 33
36.What is the value ofi corresponding to 25Answer a. .12 b .22 c. .36 d. .50
37 Repeat your answer to 36
38. Repeat your answer to 36
39. What is the value ofI corresponding to 36Answer a. 0 b 77 c. 88 d. 99
40. Repeat your answer to 39. WORK SPACE 3. Multipliers ( 5 point bonus)
Name: Given a two country world: (E Exports and H Imports) Country oz Country ﬂ
YQZCaIQ+GQ+Ea—Ha YﬁZCﬁnjﬁIGﬁIEﬁ—Hﬁ
Ca : aoc __ ba(Ya _ Tea) Cﬁ : aﬁ __ bﬁ(Yﬁ _ Tﬁ) Ha 2 Maya Hg 2 mﬁYﬁ Where Ea : Hg and Eﬁ : Ha
(10 pts 7 point are bonus) 2. Solve for Ya and determine the resulting multiplier for aa . RESULT
WORK SPACE III. (25 points) Technical Essay: Graded on a curve Fiscal and monetary policy: Objectives: What are the three major objectives of monetary and ﬁscal policy. Which is most impor—
tant for Presidential reelection, which is most important to Wall Street, and which is the most important in the long run. Justify your answers. Fiscal: (1) What are the most important ﬁscal instruments.
(2) When the governemt runs major deﬁcits year after year how does that effect ﬁscal policy. Monetary: What are the most important instruments of the FED?
Can the Fed simultaneously control the money supply and the interest rate? Discuss the issues involved.
Assume the economy has been in a depression for 3 years with 20% unemployment and decreasing prices. What would be your program to get the economy out of the depression. Justify your policy. Name: Group Leader: IV. (25 pts) )Current Events [WRITE IN INK OR LOSE 3
POINTS] 1. Why is the retirement of the baby boom going to create ﬁnancial problems with social security and
medicare especially given the new drug program for seniors. Details please
2. If the EU replaces the $ as the world currency what might happen. Consider is the replacement is quick
and if it happens slowly. How would a slow replacement affect US households.
Bonus: Bush’s plan for social security is a adaption of a plan used in what country. Is it working in that
country? Why would his plan be so much more difﬁcult to implement in this country? ...
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 Spring '07
 Staff
 Macroeconomics

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